Economic impact of minimum wage uncertain

Study recommends $6 an hour  

A 10-month study of Cayman’s lowest-paid workers, which recommends setting a $6 an hour minimum wage and a $4.50 an hour minimum for workers who receive tips, room and board or other in-kind benefits, sets out various scenarios for how such a move would impact Cayman’s economy.  

The Minimum Wage Advisory Committee report estimates the minimum wage would apply to almost 6,000 employees in Cayman, 2,600 of whom are domestic workers. 

The direct costs for employers would be $17.6 million annually at current prices and employment levels. Households employing domestic help would bear the brunt of this cost, with an estimated $10 million added to the payroll for domestic workers. Businesses, and especially small companies with fewer than five employees, would see an almost $7.6 million increase in payroll liabilities. 

With the added cost, the committee estimated between 545 and 600 jobs would be lost – about 1.5 percent of the labor force, with a $6 an hour minimum wage. A third of those jobs would be domestic workers and the rest would come from businesses. 

Anticipating concerns over higher Caymanian unemployment, committee chair Lemuel Hurlston said, “It is assumed that these job losses will exclusively affect work permit holders, rather than Caymanians and permanent residents, although of course the employers of persons losing jobs will be, in many cases, Caymanians or permanent residents.” 

There are a number of economic factors at play when estimating the potential impacts on economic growth: how much of the additional costs are passed on to consumers; how many layoffs; and whether the people who get raises from the minimum wage spend the money locally or send it overseas as remittances.  

The report lays out several scenarios for how the minimum wage would increase gross domestic product in the Cayman Islands, ranging from no layoffs and having all new earnings spent locally, to 572 layoffs and non-Caymanian minimum wage earners sending half their income home as remittances.  

With that most hopeful scenario and businesses passing all additional costs on to consumers, the report states, adjusted GDP would grow by a third of a percent. With the worst layoffs and remittances scenario, GDP would contract by 0.85 percent. 

If employers pass through only half the cost to customers, GDP growth does a little better, ranging from 0.6 percent growth to almost the same as a decrease.  

 

Problems with estimating impact  

The report points to the problems with estimating any minimum wage impact for economic growth – there are many factors at play and it’s impossible to predict how the market will react. “Economic theory postulates that higher earnings for minimum wage workers would enhance their consumer spending thereby generating additional demand for goods and services. This could be offset by any reduction in demand from those who are likely to be unemployed because of the proposed minimum wage. Similarly, higher cost of minimum wage on employers can also reduce expenditure on new investments.” 

A minimum wage, the report concludes, would also impact prices. The biggest increases would be in such sectors as housing, and services such as security guards, which rely on low-wage workers.  

The report looks at two possibilities. If employers pass all additional costs to consumers, the consumer price index could go up by as much as 0.85 percent, according to the committee’s analysis. The biggest increases would be in housing and utilities, almost a third of a percent, and 0.13 percent for miscellaneous goods and services.  

If employers pass through half the costs, the committee estimates the CPI could increase by almost 0.6 percent, led by an almost 0.2 percent increase in housing and utilities. 

 

Exceptions for waiters, domestics  

The committee recommends making a 25 percent exception for employees who receive pay or benefits outside of their hourly wage. This means that tips or accommodations can only make up $1.50 of the minimum wage, essentially setting a $4.50 an hour minimum.  

In an interview after the report’s release, committee chair Hurlston said employees who receive tips or room and board proved a point of contention for committee members. The group “battled, argued and debated quite a bit,” he said, over how to handle a minimum wage for waiters, bartenders or live-in domestic workers. 

Marc Langevin, general manager of The Ritz-Carlton, Grand Cayman, told the Cayman Compass recently that the minimum wage goes too far for waiters and bartenders. He said food services employees at the Ritz make $15 to $30 an hour with tips: “You are increasing the wage for the people that don’t necessarily need it. They are the ones that make the most money in the hotel.”  

Langevin, who also serves as the hotel industry representative for the Cayman Islands Tourism Association, said the proposal could add $500,000 to $1 million a year in wage liabilities to the Ritz. He argued that since the Ritz includes estimated tips in its pension contributions, the wage for wait staff should be based on their overall income. 

Figuring out an appropriate wage level for wait staff, Hurlston said, “was fraught with all kinds of challenges.” Every operation is different in the hospitality industry, he said. “Each one just seems to do its own thing.”  

That diversity in how hotels and restaurants operate, the expected tip levels for employees and the industry’s importance to Cayman, made the issue very difficult for the committee. 

Hurlston said if approved, the wage levels for different industries like hospitality need to be monitored and adjusted, but he acknowledged it’s much more difficult to lower a wage than to raise it. 

The carve-out for domestic workers, while included in the same exception as waiters, posed different problems for the committee. The household employer sector in Cayman will face the greatest impact on its wage liabilities, but that’s because it pays the least of each industry in Cayman. The report states that in addition to the low wages, “persons who work in the domestic realm are also often vulnerable to exploitation.” 

Under the minimum wage, employers who provide room and board would have to pay $4.50 an hour. Otherwise, the $6 minimum would apply. 

The report details some of the vulnerabilities, based on focus groups with Jamaican and Filipino domestic workers and interviews with consular officials, and includes allegations of abuse and frequent Labour Law violations by household employers. 

Nicolas Joseph, an attorney who served as co-chair of the wage committee, said there was “widespread noncompliance” with labor regulations requiring health insurance, housing standards and overtime pay. He estimated 10 percent to 30 percent of household employers fully complied with the law. He said the issues with compliance and abuse came as no surprise to him, given that for many, “the consequence of complaining is losing your employment.” 

Premier Alden McLaughlin, when releasing the report, said he personally knew of domestic workers making $60 a week. “Social justice requires that we pay a minimum wage,” he said. 

 

Setting a new ‘vulnerability’ level   

There is no nationally recognized poverty line in Cayman, so the committee used six possible scenarios to determine what the lowest acceptable annual salary could be. Those numbers range from about $4,000 a year in the 2007 National Assessment of Living Conditions to the $20,000 a year the government uses as its temporary welfare relief threshold. 

The minimum wage in the civil service is $8,92 an hour, roughly $18,500 a year. 

This range led the committee to create the two new definitions for “very low wage,” at less than $4.62 an hour or $9,610 a year, and “low wage” at less than $9.23 an hour or $19,198 a year for an average family.  

The $6 an hour recommendation falls in the middle of that range at $12,480 a year.  

The committee criticized the $20,000 a year welfare threshold, calling for an immediate review of the number. Hurlston called the level “too generous” and said setting the welfare rate that high made it less likely for people receiving government assistance to have the incentive to find work. 

Instead of setting a “poverty rate” committee members developed what they call the Cayman Islands Economic Vulnerability Threshold. They set the EVT at $5.22 an hour, which is $905 a month or roughly $10,900 a year. 

At a press conference to release the report, Premier McLaughlin said work permit holders with so little income have created “social conditions that have not done well for Cayman” and promised the implementation of a minimum wage.  

He said his entire caucus supported creating the wage advisory committee, and he will recommend that the Legislative Assembly accepts the report. He plans to release details on when and how government will take up the proposal at the legislative session in May when he presents a budget. 

langevin

Marc Langevin

Alden_McLaughlin

Premier McLaughlin

Lemuel-Hurlston

Lemuel Hurlston

NO COMMENTS